If the fall of the Soviet Union nearly 30 years ago marked the end of the Cold War and ushered in an era defined by the so-called Washington Consensus and its free market principles, the ongoing Covid-19 crisis could see the dismantling of the consensus and herald a new era in which governments will play a larger economic role.
Fidelity International, the US-based fund manager, describes this shift in a white paper as “the new economic order… of increased government intervention displacing the free-market policies pursued since the 1980s”. Deutsche Bank Wealth Management, in another recent report, describes capturing “kairos”, a Greek term that refers to a moment in time where we can change things. “For several decades, the desire has been to privatize publicly-owned enterprises. But this trend could now be slowed or even reversed.”
Of course, history is repeating itself. As was the case in the Great Depression of the 1930s – which saw the rise of the British economist John Maynard Keynes and his ideas around governments’ role in mitigating a recession or depression – and again in the 2008 financial crisis, Covid-19 has prompted governments and central banks, particularly those in the US and Europe, to intervene massively to mitigate a financial crisis. However, unlike the Great Depression, the more recent crises have prompted leading critics to complain of “privatizing profits and socializing losses”.
These comments are reinforced by how the two largest economies, the US and China, handled the pandemic. In a paper for the Asia Global Institute entitled, “The Decline of the West”: What is it, and Why Might it Matter, Mark Beeson, professor of international politics at the University of Western Australia, notes that, as of April 2020, it is impossible to know the long-term impact of this health emergency, but not the different responses of countries’ leaders to it.
“In China, after an initial attempt to conceal the gravity of the problem, the authoritarian regime moved swiftly to impose social controls that appear to have been effective, albeit of the kind that populations in the West find difficult to accept,” he writes. “In the US, the Trump administration’s rather chaotic response, compounded by an inequitable and highly inefficient domestic health system, made an unflattering contrast. Even those with little sympathy for [China’s] often heavy-handed approach to social control recognized that in some circumstances this could be brutally effective.”
Indeed, The Asset’s conversations with financiers over the past weeks suggest an emerging consensus. “Going forward, we will see an increased role for governments in directing economic activity, and for supranationals [such as the World Bank, Asian Development Bank and export credit agencies]. We will see more blended finance,” states the head of sustainable finance at a European-headquartered bank.
To be sure, it is a model that is prevalent already in Asia, where governments play a larger role in their countries’ economies, especially when compared with the US. “Significantly, the Washington Consensus had limited impact and appeal in East Asia where a highly successful tradition of state-led development prevailed, which China enthusiastically adopted,” Beeson points out.
The global health crisis, as it enters the recovery phase, is reinforcing this approach, especially in demonstrating the need for an effective and direct transmission mechanism similar to China’s. “State-owned companies are a very effective way to kickstart the economy as fast as possible,” points out Ben Simpfendorfer, founder and CEO of Silk Road Associates. “Other countries may be looking at it and thinking perhaps a bit enviously. At this point in time [of stress], it is one thing to get money to the economy, it is not the same to get companies and households to actually spend it. State-owned companies are an effective way to get that done.”
Following Covid-19, it will be a surprise if the West will not respond with more regulation, especially in relation to healthcare, and environmental, social and governance (ESG) matters. Fidelity’s white paper argues that “the nascent reversal of liberalization, deregulation and free-market politics – which were first ushered in by Margaret Thatcher and Ronald Reagan in the 1980s – has now moved into overdrive.”
“Attention to societal values is going to happen in different ways in the US versus China, and that is because of their starting points,” notes Paras Anand, Fidelity’s chief investment officer, Asia-Pacific, who cites the example of US and Chinese global technology platforms in which he sees an interesting contrast.
“You can quite clearly see some of the platform companies in the US have sought to circumnavigate or avoid elements of regulation. The philosophy is around how can I have the lightest touch possible in that regulatory context,” he shares. “As we kind of know and understand as investors in China, companies, such as state-owned enterprises and private-owned enterprises, developed with that strong alignment to societal or government priorities.”
In the case of the Chinese tech giants, according to Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity, “you can see that they always had in their business model quite an embedded focus on their role in society, whether it is Tencent voluntarily restricting gaming hours because of concerns around gaming addiction, or Alibaba’s purpose in ensuring that commerce is made easier for Chinese consumers”.
Anand expects that the gap between the US and the Chinese tech giants’ approach will inevitably narrow as the role of the US government grows in the context of the economy in the post-pandemic environment. “[Governments] are going to want to have a greater say, and ensure that the corporate sector – especially in the US – think about its broader societal contribution in a way arguably it really has not done, or has not been required to do for the years leading up to Covid-19.”
In the report of Deutsche Bank Wealth Management, co-authors Christian Nolting, global chief investment officer, and Markus Muller, global head chief investment officer, suggest that the need to reconsider the relationship between private and public sectors as not so much to do with ideology but with future reality. “Governments will likely be forced to step into some sectors seen as systematically relevant, for example, airlines, utilities, infrastructure, health, housing, simply to prevent them from collapse.”
This will force “a new debate on the role of competition and profit margins, as well as how to ensure acceptable quality of supply – for example, through different wage structures in order to incentivize people to work in certain sectors. All this will create major challenges for economies and investors, but also opportunities. This is particularly evident in many of our long-term investment themes: healthcare, enhanced infrastructure, and technology in various forms”.
Even governments in Asia and the public sector, however, will need to reassess their own capability. While some, by and large, were praised for their effective response to the health crisis, future budgetary constraints will mean continuing reliance on the private sector to do their part. “As we shift to recovery mode, we will see an increased public-to-private co-operation in certain sectors, [however] perhaps not in the healthcare sector where governments will play a bigger role in terms of making sure that sector is secure given what happened, which means less private funding or less private parties involved in that sector,” believes one banker.
There is also a need to address what Nolting and Muller say is the “social contract” – the Age of Enlightenment term for the authority of the state over the individual. “There will, of course, be lessons to be learnt from how heavy social control has apparently allowed some countries to exit this crisis quickly, and this will open up a debate on the relative efficiency of different political systems in dealing with such a crisis. But we do not want to throw away some hard-won democratic ideals in the process of agreeing a better future response – throw the baby out with the bathwater, in the old English phrase.”
Fidelity’s white paper, written by Andrew McCaffery, global chief investment officer and team, forecasts a U-shaped recovery with a global recession in 2020 and GDP growth of negative 1.7%. But because of deeper structural elements, he also thinks that Asia is primed for economic leadership. “Asia has higher economic growth, stable political regimes and wide-scale adoption of technology that will help it take the lead.”
The paper also points to “mainland China, Hong Kong, Taiwan and South Korea as having demonstrated organized, disciplined, well-resourced and targeted reactions to the outbreak and, as a result, [they] appear to have it more under control than others and are beginning to re-open their economies. This puts Asia at an advantage as the rest of the world still organizes its responses”.